Small Cap Stocks

A company with a market capitalization near the low end of those publicly traded -- calculated by taking a firm's current share price and multiplying that figure by the total number of shares outstanding - is termed small-cap. Small-cap firms possess market values larger than micro-cap companies, but smaller than those in the mid-cap range.

Small-cap stocks are often cited as good investments due to their low valuations and potential to grow into big-cap stocks, but not all small-cap companies have low stock prices. Stock prices by themselves reveal little about the size of a company, which is why market capitalization is such a widely used measure.

Small-cap stocks are shares of smaller companies, which in the current market are defined as those worth $300 million to $2 billion. If you don't appreciate how big small-cap stocks have become, you'll undoubtedly miss some good investment opportunities. Small-cap stock can be a lucrative investment because it often has low trading prices and it offers potential for rapid growth, especially if the company is in a hot sector or has an impressive new product.

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In general, smaller companies are not as financially stable as bigger firms, lack the resources to easily weather economic downturns, and are more likely to have limited or unproven product lines -- all of which lead to increased volatility. On the other hand, stock prices are -- to a certain extent -- a function of earnings growth, and smaller companies are often able to increase their profits at a faster speed than larger businesses. Consider how much easier it is to double a start-up company's profits from $1,000,000 to $2,000,000 in a year's time than to double the net income of a business with annual earnings of 15 billion dollars. The potential for greater capital appreciation clearly lies with small-cap companies.

Small-cap stocks tend to utilize market niches effectively precisely because they are small and interested in creating market share as opposed to buying it. Small-cap companies usually focus on one or two growth prospects and maximize those opportunities, whereas small-cap stocks tend to be centered on products involving innovative technologies.

To sum up, small-cap stocks have a high risk/reward ratio. Because of that they may appeal to investors able and willing to withstand extreme volatility in order to potentially reap huge capital appreciation. By utilizing basic intelligent analysis, it is quite possible to find undervalued small-cap stocks that represent a golden opportunity.